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Morningstar | Lloyds Closes 2018 and Increases Shareholder Distributions

Narrow-moat Lloyds Banking Group reported full-year 2018 profits after tax of GBP 4.4 billion, in line with our expectations. We plan to roll our model forward and update our analysis with 2018 figures as well as 2019 guidance, but we don’t expect to materially change our fair value estimate of GBX 76/$3.90 per share. Our narrow moat and stable trend ratings are unchanged.

On an underlying basis--excluding restructuring expenses, volatility items, and payment protection insurance provisions--Lloyds recorded a solid full-year performance. Net interest income increased 3% while operating costs remained flat and remediation costs decreased. Underlying profit grew 6% to GBP 8.1 billion and underlying return on tangible equity came in at 15.5%. The gap between Lloyds’ underlying and statutory results remains significant, however. In 2018, the costs management likes to exclude in its underlying performance amounted to GBP 2.1 billion versus GBP 2.4 billion the year before, lowering actual returns on tangible equity to 11.7%.

Lloyds delivered on its target to build its capital base by 200 basis points in 2018. With the final tally coming in at 210 basis points, the group proposed to increase shareholder distributions as we had anticipated it would. The distributions are proposed to take the form of a 5% higher dividend compared with 2017 as well as a share-buyback program equivalent to 2.46 pence per share. In total, the distributions will amount to GBP 4 billion, of which GBP 1.75 billion is allocated for buybacks and the remaining GBP 2.25 billion for dividend payments. The common equity Tier 1 ratio after dividends and share buybacks stands at 13.9%, in line with the group’s 14% target including management buffers.